Cash transfers will lead to better functioning of oil and gas markets: R S Butola

Three months after the government decided to cap the number of subsidised liquefied petroleum gas (LPG) cylinders and allowed oil marketing companies to raise diesel prices, Indian Oil Corp is finding the going tough. In an interview withJyoti Mukul, the company’s chairman and managing director, R S Butola, says the cap and direct cash transfer are indicators of better-functioning markets. Edited Excerpts:

Do you think capping the number of subsidised LPG cylinder was a good decision, given that the government could even have gone for a price hike?

The government’s decision on capping was in view of the larger macroeconomic scenario. Last year, we had an underrecovery of $26 billion. Of this, $16 billion was on diesel and the rest on superior kerosene oil and LPG. Global LPG prices have shot up. It is the only commodity that is imported. We have surplus of all other products. The burden on account of LPG alone is going up. The principle of pricing the product at the market level would help, irrespective of whether the number of subsidised cylinders is capped at six or nine. The sheer notion of either having market price or limited subsidy puts resources to an optimal use. If something is available cheap, there is no restrain. Capping and direct cash transfers are some indicators that enable better functioning of markets.

How prepared are oil marketing companies for cash transfer of LPG and kerosene subsidy?

For kerosene, pilots are being done. In 51 districts, we are working out the mechanism for LPG. It is a challenge. The idea in these districts is that LPG cylinders are sold at market rates and the price differential is credited in the accounts of the consumers who have taken delivery. We hope the subsidy should be directly passed on by the government. We do not want any burden on us. We have requested the government. Since we would be selling at market price, the government should directly credit. In the case of kerosene, we have done the funding. We transferred the differential of market and subsidised rates to the state government for those to be credited to consumers’ bank accounts. But that’s not our job. The grant would be given by the government for the first time.

Do you see diesel deregulation or differential pricing happening in the near future?

Diesel deregulation is a big issue, and difficult, too. But, going forward, the government would have to think what could be done on that. Differential pricing will be difficult in a big system. But those who need to be subsidised should get this directly.

The government is revisiting the underrecovery figures and there is also a suggestion that the pricing for companies should be cost-plus. What are your views on this?

Till the administered pricing mechanism was dismantled, it was cost-plus. We would be happy if we are given cost of production plus a certain assured rate of return. After the administered price mechanism, the whole debate was around efficiency and that the company should be given market prices — the reason why we invested in expanding marketing facilities. The industry spent Rs 32,000 crore when we moved to Euro IV (emission standards).

There have been concerns on refining margins. In which direction do you see those going?

The refinery industry is in a serious problem. One is a problem of subsidy, but our major problem is that refinery margins are shrinking. Refinery margin may be good in an odd month, but the prognosis is that these margins are going to be under pressure. Consumption of petroleum products is coming down and even in China, the demand is not growing. In India, except for diesel, demand is not growing in respect of other petroleum products. ATF (aviation turbine fuel) demand has also fallen because, the industry is not consuming. Worldwide, margins are depressed. It is a worrisome game for refinery companies. On top of that, the impact of subsidy and interest is aggravating our problems. We are doing everything possible to reduce our cost. Unfortunately, all our refineries are land refineries. We need to invest so that we can process heavier crude. We invested sufficiently in the past to process high sulphur crude oil. We have to invest to the extent it is possible and till it is viable. Our refineries are at par with the best and all this happened because the refinery industry was doing well. Last year was bad because of entry tax. Many refineries in Europe and America have shut.

We declared 14 cents as refinery margin for H1. We have approximately slightly less than $3 operational cost, including depreciation. The impact of interest is $1, so we need refinery margin of $7-8 but as against that we had only 14 cents. While we are doing our best, we hope if 100 per cent subsidy is provided, we should be able to manage our affairs well. The impact of interest is beyond us.

What kind of investment plan has Indian Oil chalked out?

This year, we are investing Rs 10,000 crore. A major portion of this will go to the Paradip refinery, for which we have tied up funds. During the 12th Plan, we will be investing Rs 56,000 crore. Some additional funds would be required if we go for acquisition but it looks difficult as of now, due to heavy borrowings.

When are you likely to complete the west coast refinery?

It is at the concept stage. There is a group within the company working on this. It will come up only in the 14th Plan. Although there is a surplus of petroleum products right now, post 2019-20, there will be a need for another refinery. Indian Oil refineries are land-locked, which gives us the advantage of being closer to market, but there is the disadvantage that we have to incur costs to move crude oil. This also impacts the ability to push heavy crude. We realised that in the east coast, we will have Paradip but in the west coast we do not have any refinery. The nearest we have is the Gujarat refinery. The west coast refinery will be a modern refinery, capable of processing any crude and will be feeding Indian as well as export markets.

Another major project on your agenda is the regasification terminal. When is that expected to come up?

We have got clearance from the government of Tamil Nadu to set up a terminal at Ennore. We have also got fiscal incentives from the state. It will be a joint venture with the state government but we will have the major equity. Environment clearance is being pursued. We are in talks with the Ennore port for land allocation. Once that happens, we will go for award of contracts. The state government will be the anchor partner, but we are open to other partners as well. Any partner should be able to help us in sourcing gas. We will invest Rs 4,500 crore.

How do you plan to get over the issue of tying up gas and also selling imported gas in the domestic market since it is expensive?

We are not in a hurry to get into long-term contracts. The current LNG market is volatile. In the given circumstances, we either first tie up the source of gas and then spend money on construction or go in for construction rather than taking the risk of signing the gas sales purchase agreement right now. The structure of pricing will change over a period of time. We will adopt the second option even if we do not tie up long-term; we will go ahead with construction and maybe tie up a small quantity. We had earlier expected the terminal to come up by December 2015, but (now) it seems it will come up by 2016. It will have a five million tonne capacity initially, with the option raising it to 10 mt.

As far as sale of gas is concerned, we are the largest marketing company. Gas buyers are customers to whom we are supplying fuel oil and naphtha. Besides, we market our share of gas from Petronet LNG Ltd. Our CPCL refinery also uses natural gas and in Tamil Nadu, there are other industrial units who need gas. Price is an issue, but marketing will not be an issue. We have an MoU (Memorandum of Understanding) with customers who have expressed interest.

Source: Business Standard

We would like a transparent mechanism on the oil subsidy

Oil India Ltd was the only government company that did well when it went to the stock market last year. Six months after its listing in September 2009, the company is preparing plans to make acquisitions abroad. In an interview with Ajay Modi, OIL chairman and managing director N M Borah rues the unpredictable nature of the oil subsidy and says the company would continue to focus on its core business of exploration and production. Edited excerpts:

What has been the impact of subsidy outgo on your PAT (profit after taxes)? Was OIL’s burden sharing in 2009-10 lower than 2008-09?

Subsidy has been lower in 2009-10, primarily due to lower crude oil prices. We are expecting an improvement in PAT during 2009-10 due to lower subsidy. But, there has also been a volume increase in crude oil production, which contributed to a higher top line and bottom line. In 2008-09, we had a substantial jump, o*f 12 per cent, in crude oil production. We sustained the increase in 2009-10. While a 12 per cent increase is not possible every year, we have registered a three per cent increase over the high base of 2008-09.

How was higher production achieved?

Increasing production has been a combination of technology induction and increase in drilling efforts. We increased drilling efforts by 30 per cent in 2009-10. An increase in drilling in the right areas leads to increased production. Additionally, technology like horizontal drilling and intensification of IOR/EOR has resulted in production improvement.

How much investment goes into such measures?

In 2009-10, our capex expenditure was about Rs 2,000 crore. This was mainly spent in our core areas of business, which are exploration, development and production. Usually, 45 per cent of our capex goes into exploration, aimed at augmenting reserves, while the remaining 55 per cent is spent on development and production.

The Kirit Parikh report suggested sweeping reforms. Its implementation would have been in the interests of the oil companies. However, so far no decision has been taken and there is lack of clarity on subsidy sharing for 2010-11. How does it impact OIL? 

The uncertainty affects us, especially after we got listed. Our investors are keen to know what kind of subsidy we will have to bear. Our stand remains the same as earlier. We would like to have some kind of transparent and predictable mechanism. As of now, that is not in place. A predictable mechanism can help us to assess more firmly our future revenue stream and help the investors.

Will it be fine if the current mechanism (where the upstream oil companies like ONGC and OIL bear only auto fuel subsidy) continues?

I think that is a hypothetical situation. We still do not know for sure what would happen. Moreover, it will depend on the crude oil price.

What is your capital expenditure plan for 2010-11? Are you eyeing acquisitions overseas?

This year’s capex plan is almost double, at Rs 4,400 crore. Of this, around Rs 2,000 crore we have earmarked for acquisition of oil/gas assets overseas. We are looking to buy producing properties or at least a participating interest in some producing assets. We are also keen to acquire blocks where discovery has been made and development is pending or even in mature fields, where we can enhance production with our in-house competence. But, the amount of Rs 2,000 crore is only indicative. The actual amount will depend on the kind of target assets.

By when can we expect a deal?

It is difficult to give a timeline.

What is the status of OIL’s overseas projects? 

OIL has presence in a few countries such as Libya, Nigeria, Yemen, Gabon, Timor Leste, Egypt and Iran. It is the operator in two areas in Libya and in Gabon, while it holds participating interest in blocks in other countries, as a consortium partner. All the blocks are in various stages of exploration. The most advanced stage is in Libya, where we have started an exploratory drilling campaign as the operator. Recently, as a member of an international consortium, we won a bid for developing a significant heavy oil resource base in Venezuela. Our partners in Venezuela are ONGC Videsh Ltd (OVL), Indian Oil Corporation Limited (IOCL), Repsol and PETRONAS.

How much money will OIL invest in Venezuela? 

We estimate an investment of about half a billion dollars over six-seven years for the 3.5 per cent equity.

Does OIL have plans to float a subsidiary on the lines of OVL for its overseas business?

There have been some thoughts on these lines. But, we have not come to a decision.

What kind of activities is OIL undertaking in the downstream sector?

Our core competence is in exploration, production, design, engineering, construction,operation and maintenance of long-distance pipelines. We do not see a major shift from these areas in the foreseeable future. We are not going to become a downstream company overnight, because we do not have the core competence for that business segment.

On the upstream side, a lot of scope remains even within the country. The limited downstream activity that we have done and are doing is to spread our risk as a corporate entity. In case of some international upstream opportunities where the downstream business is also attached, we will go for it, since we have IOC as a partner.

Is the delay in APM gas price revision hurting OIL?

We have made a case that the price should go up. The cost of producing gas has gone up due to an upward movement in cost of equipment, oilfield services and manpower. We need to get a commensurate price.

How has the listing of the company helped OIL, especially in terms of valuation?

We have gained better visibility. OIL has always had low visibility and was confined to the northeast. There is an expectation from investors and it is a motivating factor to expand.

Source: Business Standard

__________________________________________________________________________________